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In the face of IRS unknowns, focus on fundamentals

In our post of Jan. 19, we noted how the IRS indicates that it will continue relying on business whistleblowers in tax collection efforts. The agency's recent report to Congress hails the fact that such tips resulted in collections of over $3 billion since 2007. Payouts to the whistleblowers were in the millions by comparison.

With that in mind, more such action seems likely in 2017. Aggressive auditing by Minnesota and Wisconsin officials seems logical, too. Understanding the legal implications of and responding is best done with guidance from experienced counsel.

Considering the current state of affairs and that we are approaching the tax season, it seems a good time to highlight fundamental things you can do to reduce the chances of becoming a target. You may not be able to anticipate being named by a whistleblower, but as our previous post stated, there are practices individuals can follow to limit exposure if it happens.

Get the math right

Mistakes happen, but obvious errors in addition and subtraction shouldn't. The IRS knows this and watches. In 2014, the IRS spotted more than 2 million math mistakes on returns. It's not clear how many of those were in favor of or against the filer. Regardless, minimizing errors reduces chances of audits.

Don't dodge dollars earned

The requirement of the law is that you report all income earned in a given year. It might be tempting to ignore reporting of some cash payments, but it's risky. Most income is recorded with the IRS anyway through a W-2 or 1099 form, whether you report it or not. Numbers on the forms and your return need to align.

Be honest about charitable giving

Attention to this issue is probably higher right now than it has been in a long time in the wake of the recent election. Just as insurers have data that measures risk statistics, the IRS has a sea of information on average taxpayer behavior regarding charitable giving. Returns that reflect excessively high deductions could raise a flag. If an audit results, documented proof better be available.

To your own self-employed earnings and losses be true

Self-employed individuals can take legitimate business deductions for expenses. Any that seem suspicious, though, could trigger an audit. Documentation of donations is crucial. If a deduction you believe is legitimate is redlined under audit, litigation could follow.

The value of sticking with fundamentals is clear.

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